Pros and Cons of Tax Refunds

Pros and Cons of Overwithholding

It may seem like a good idea to have the IRS take out too much money and get a large refund around tax time. If you think about it, you are really giving the government an interest free loan. While the government borrowed your money, you were likely going into debt paying interest or late fees to make ends meet. Even worse, creditors with judgments can wait until you are likely to receive a refund and file a garnishment against your bank account to get it. The excess withholding would have been for nothing.

Pros and Cons of Underwithholding

If you withholding too little, you may see a large paycheck to pay bills, but the tax man will not go away. Paying too little in taxes can lead to penalties for underpaying. These taxes are not subject to bankruptcy discharge for at least three years. Your disposable income will be higher, which means more money that can be garnished. You are basically taking money that should pay taxes and paying it to creditors.

What you can do.

The Internet is full of calculators and spreadsheets that can held up set the correct amount to withhold. All it takes is filling out a new W-4 if tax withholdings very greatly from tax liability. Also fill out a new one with every change in your life (e.g., new child, child grows up, adding or subtracting deductions). Don't let your creditors take the money that should pay the tax man and do not give a free loan to the government.